Queen Elizabeth II - 1926-2022 - Your Money September 9th 2022
Posted by Steve Bokor
Well thank the lord August is behind us. The lack of buyers combined with a plethora of sellers caused markets to slide for the last two weeks of the month. And believe it or not, September has not, historically been a great month for stock investors. Further, this past Tuesday and Wednesday looked like history would repeat itself. To complicate matters, investor psyche has oscillated yet again with the prevailing opinion that “bad” economic stats are good for stocks and vice versa.
The exception to the rule would be energy prices. As a major component of inflation, higher prices signal more aggressive tightening by the Federal Reserve as a means of slowing it down. Crude oil peaked the end of June and has been steadily falling for the last ten weeks or so. With lower gasoline prices, consumers feel more positive about their outlook, but the higher prices also curtailed summer vacation plans for many Americans and Canadians and left the industry with a short-term supply glut. Crude oil prices sunk to just over $80 per barrel this week, the lowest price since early January. Mind you it closed at $85 today and readers should know the quoted price is for the December futures contract. It is also important to note, the futures market is dominated by speculators trading contracts in Chicago and New York rather than oil producers and refiners hedging their inventories. In my opinion it does not reflect the long-term supply demand curve which should drive prices higher given declining exploration budgets and well production. Remember, the planet reached a population of seven billion in 2011 and it is forecasted to hit 8 Billion this November and 8.5 Billion in 2030. That is a lot of demand for gas and heating oil.
So back to inflation. The US stats come out on Tuesday and Wednesday but in my opinion even a big negative number will not be enough to sway the Fed from raising rates another 75BP. No surprise both the Bank of Canada and the European Central Bank hiked rates by 75BP this week with the promise of more to come. To put that in perspective, 10 Year Canada Bonds yield 3.13%- while 2-Year bonds yield 3.61% and historically, inverted bond yields are the precursor to recessions and bear markets. Which brings up two possible scenarios. Either the inversion is temporary because economic activity stalls forcing central banks to reduce rates (ala The US under Fed Chair Volker in the late 1970s’) or longer-term interest rates rise above short-term rates, in which case long-term bond investors are in for some additional pain. The ones that can, especially the credit specialists, have been reducing their average term to maturity to capture the better rates and provide them with room to buy up distressed bonds at rock bottom prices. Call us if you would like to know more about this. Don’t worry the scenario will take months to play out.
As for stocks, the growth names drove the rally this week (think technology versus industrials - Shopify up 14%) plus financials (remember banks and insurance companies make money when interest rates go up: RBC jumped 3%), along with gold and material names ( First Quantum up 11%, Ivanhoe Mines up 12%). As a matter of fact, the TSX once again outperformed US markets primarily for our increased exposure to these sectors. On the earnings front it is a bit of a vacuum next week, so I think most investors will focus their attentions on the inflation stats plus comments from a number of Fed President speeches throughout the week ahead of the rate decision on the 21st.
Finally, we were saddened to hear the death of Queen Elizabeth and our condolences to her family. She was truly a great monarch and devoted her life to her country and her presence will be missed. She was a leader for humanity.
Happy Trading and Stay Safe.
Cheers Steve and Michele.
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